Steel Dynamics (STLD -2.06%) doesn't have the long history of a peer like United States Steel (X -0.49%), but that's actually been a huge benefit for the industrial (and industrious) up-and-comer. And now, it is eyeing an expansion into the aluminum industry, where it thinks it can capitalize on the same trends that helped it to succeed in the steel space.
Here's why the steel industry upstart is spending $2.5 billion to start making aluminum.
A history of success
Steel Dynamics is one of the largest steelmakers in North America. Its industry is highly cyclical, with demand generally rising and falling along with economic activity. That makes sense given that steel is a key input into everything from highway construction to building skyscrapers to making washing machines. And yet, despite the inherent variability of the market in which it operates, the company has increased its dividend annually for 13 consecutive years. And over the past 10 years, the compound annual growth rate of its payout was a hefty 15%.
STLD Dividend Per Share (Annual) data by YCharts.
While steel industry giant Nucor (NUE -1.04%) has a much longer streak of annual dividend increases (that much older company has achieved Dividend King status), its dividend growth rate doesn't come close to what Steel Dynamics delivers. In fairness, that's partly because Steel Dynamics is a younger and smaller company. Greater growth percentages are easier to achieve off of a smaller base. But Steel Dynamics has really done a pretty incredible job of excelling in the steel sector.
A key reason for that is that it uses the most modern technology. In the steel sector, that's electric arc mini-mills. These facilities, which also underpin Nucor's business, are smaller and more flexible than the older blast furnace technology used by competitors like U.S. Steel. And this is where Steel Dynamics' decision to enter into the aluminum sector comes in.
Big money is needed to make big money
At this point, Steel Dynamics is a major and well-respected player in the steel space. It wants to use the strong foundation it has built to grow. Steel remains an important growth platform, particularly higher-margin specialty products, but management thinks there's an adjacent industry that is ripe for investment. That's why it's spending roughly $2.5 billion to build an aluminum operation.
Actually, it's already a big player in aluminum: Its OmniSource scrap metal business is the largest recycler of aluminum in North America. This gives it a built-in supply just waiting to be exploited. (It already uses a vertically integrated model in steel.)
Beyond that, Steel Dynamics sees a number of similarities between conditions in the aluminum market today and the way the steel market looked before it entered that sector. Specifically, the aluminum industry is littered with old assets that received little reinvestment and are held down by legacy costs. An inefficient industry with high-cost operations is practically asking to be disrupted by investment in new, more efficient plants. On top of that, management believes that there is a deficit in the aluminum supply that will grow in the future. That makes its strategy even more understandable since growing demand should be able to support additional industry players.
A slightly different story
No big capital project is easy, and Steel Dynamics will have a lot of work to do before it can claim its aluminum expansion is a success. However, investors in this growth-oriented steel company should keep a close eye on this $2.5 billion project. It could, if things work as planned, give the company another platform for growth. That would further differentiate it from its closest peers and, perhaps, provide it with an even longer growth runway. While the stock is rarely cheap, Steel Dynamics is probably worth a deep dive for dividend growth investors even if it only gets put onto your wish list -- just in case the market gets irrational.
